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What’s a capitalization rate?

by Gary Kent / Friday, 20 September 2019 / Published in Q&A - Home Investing Questions

Question:

“What’s a cap rate?”

Answer:

Cap rate is short for “capitalization rate.” Cap rate is the rate an investment property earns money, as a percentage of the value of the property.

It’s similar to an interest rate on a CD. And it’s also your % return if you buy the property for cash.

You calculate cap rate by dividing the net operating income (gross rent minus gross expenses NOT including mortgage) by the value of the property.

For example (using simple round numbers):

  • You buy a $200,000 condo
  • It rents for $1,000/month, or $12,000/year
  • Expenses are $500/month, or $6,000/year
  • The net operating income is $500/month, or $6,000/year
  • $6,000 NOI divided by $200,000 value = 3% cap rate

Cap rates in San Diego typically run from 3% to 5%.

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Tagged under: ask gary kent, san diego real estate investment

About Gary Kent

Licensed since 1984, San Diego real estate broker Gary Kent is a recognized authority on real estate. In addition to selling over 5,500 homes for clients, he has been an expert court witness, trainer of other agents, and he does seminars on home buying, home selling, and investing. Gary has sold homes for The Salvation Army, dozens of major banks, and Fannie Mae, amongst others. You can find Gary on Facebook, Instagram and YouTube.

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